China Stock Obituary 2011
posted by The Traveller on Saturday, July 23, 2011
China Agritech (CAGC.PK) is currently trading at $1.65, down 86.56% for the year. The Trading China Tracker Score is UNDER REVIEW, the Trading China Safety Score is 8% (Extreme Risk).
Fertilizer company China Agritech has been accused of many things, among them drastically overstating the scope of its business. Things turned fatal when CAGC did not file its annual report for 2010, and subsequently dismissed its Big Four auditor Ernst & Young with very questionable reasoning. CAGC has since engaged a new auditor, California-based Simon & Edward, and a new chairman for both the audit committee and the special committee that was formed in March to look into the matters that led to the initial Nasdaq trading halt. In late May the Chief Operating Officer of CAGC resigned. We haven't heard any details from the ongoing investigation for the past three months, and the company's stock is trading on the pink sheets since May 20, 2011.
China-Biotics (CHBT.PK) is currently trading at $1.73, down 88.27% for the year. The Trading China Tracker Score is UNDER REVIEW, the Trading China Safety Score is 7% (Extreme Risk).
Probiotics company CHBT has been under attack for more than a year until on June 22, BDO Limited, the company's auditor for more than five years, resigned. The firm found several "irregularities" that "likely constitute illegal acts", including fake documentation and being directed by the Company to access a suspected fake website for the company's bank account. One day later, the company's CFO and the Chairman of the Audit Committee resigned as well. The stock was delisted from Nasdaq on July 1 and finds itself now on the pink sheets.
China Century Dragon Media (CCDM.PK) is currently trading at $0.30, down 94.29% from it's IPO price of $5.25 (February 8, 2011). The Trading China Tracker Score is UNDER REVIEW, the Trading China Safety Score is 7% (Extreme Risk).
On March 22, just six weeks after CCDM's IPO on NYSE Amex, its auditor found "an indication that the accounting records have been falsified, which would constitute an illegal act." The company was unwilling to let its auditor obtain official bank records directly from the bank, and MaloneBailey resigned its engagement with the company. Similar to all the other cases, the stock was halted by the exchange, delisted, and is now quoted on the pink sheets since June 21, where it is now a "zombie stock" with not a single share having changed owners in the past four weeks.
China Electric Motors (CELM.PK) is currently trading at $0.33, down 92.73% for the year. The Trading China Tracker Score is UNDER REVIEW, the Trading China Safety Score is 0% (Extreme Risk).
CELM was destined to share the fate of the other WestPark deals NIVS, CILE and CCDM (for details please see: "WestPark Capital's RTO Deals"). The auditor (MaloneBailey) found discrepancies in the bank statements, a Special Committee was formed on March 31 to investigate those issues, and an SEC investigation was launched on April 7. On May 24, all of the members of the Special Committee resigned, the company terminated the forensic audit by PricewaterhouseCoopers, and at least one independent director resigned as well. MaloneBailey finally resigned as the company's auditor on May 31, stating "management’s unwillingness to take appropriate actions" and "an unwillingness to cooperate with the Securities & Exchange Commission and Nasdaq." The Chief Financial Officer left the company on the same day, and the Chairman of the Audit Committee followed on June 3. CELM was subsequently delisted from NYSE Amex and is trading on the pink sheets since June 14, 2011.
China Integrated Energy (CBEH.PK) is currently trading at $0.69, down 90.59% for the year. The Trading China Tracker Score is UNDER REVIEW, the Trading China Safety Score is 6% (Extreme Risk).
Biodiesel maker China Integrated has been accused of significantly overstating its revenue and profits. The company's auditor, KMPG, first signed off on CBEH's annual report for 2010, then shortly after withdrew its opinion and resigned on April 26, stating that it is no longer able to "rely on management’s representations in connection with its 2010 audits of the consolidated financial statements and the effectiveness of internal control over financial reporting of the company." China Integrated launched an investigation into these matters, but on April 28 its CFO resigned and shortly after, on May 3, a member of the audit committee left the company, saying that "recent events, including but not limited to the inconsistencies between representations made by CBEH’s management to the Board of Directors, have eroded my confidence." The company has since hired a new director and CFO and says it "remains committed to identifying and engaging a new auditor as soon as possible." The stock has been delisted from Nasdaq on June 15 and is now quoted on the pink sheets.
China Intelligent Lighting (CILE.PK) is currently trading at $0.11, down 95.85% for the year. The Trading China Tracker Score is UNDER REVIEW, the Trading China Safety Score is 6% (Extreme Risk).
When CILE's auditor (MaloneBailey) resigned on March 24, it gave to protocol that it found "accounting fraud involving forging of the Company's accounting records and forging bank statements, in addition to other discrepancies identified during its testing of the Company’s accounts receivable." The Chairman of the Audit Committee resigned on the same day. China Lighting's stock was delisted from NYSE Amex on June 20 and is currently quoted on the pink sheets. It should be noted that the company hired Friedman LLP as its new auditor shortly after MaloneBailey's resignation (see also NIVS).
China MediaExpress (CCME.PK) is currently trading at $1.60, down 89.90% for the year. The Trading China Tracker Score is UNDER REVIEW, the Trading China Safety Score is 0% (Extreme Risk).
The CCME story is well-documented and I don't have to go into details again. The company lost its auditor, CFO, Chairman of the Audit Committee and independent directors through resignations in March and April, and has not hired any replacements since. It is unclear if the special committee that was formed on March 17 is still working on the internal investigation into the accounting matters, as the company has not updated the investment community in the past four months. CCME has been delisted from Nasdaq on May 19, 2011.
HQ Sustainable Maritime Industries (HQSM.PK) is currently trading at $0.24, down 94.97% for the year. The Trading China Tracker Score is UNDER REVIEW, the Trading China Safety Score is 9% (Extreme Risk).
HQSM's auditor could not confirm the cash balances in the company's bank accounts nor verify the existence of customers in China. In its resignation letter dated May 26, the auditor claimed HQSM's management resisted its efforts to address these issues and became "increasingly non-responsive, uncooperative and non-communicative." The company's account of what happened paints a different picture. As of July 1 the company has only one independent director left, all the others resigned, including the Chairman of the Audit Committee. The SEC has initiated a formal investigation into HQSM. On July 11 the stock was delisted from NYSE Amex to the pink sheets after having been halted since April.
NIVS IntelliMedia Technology (NIVS.PK) is currently trading at $0.35, down 84.52% for the year. The Trading China Tracker Score is UNDER REVIEW, the Trading China Safety Score is 0% (Extreme Risk).
In its resignation letter on March 24, the company's auditor, MaloneBailey, said it found "illegal acts involving the Company’s accounting records and bank statements and discrepancies in accounts receivable." NIVS managed to engage BDO China as its new auditor shortly after, but on May 14 they resigned as well, stating the company's inability to provide "certain critical financial related documents and records." Since May 19, Friedman is the company's independent auditor, we will see how long that lasts... The special committee that was formed to look into the accounting issues broke apart on July 11 when two directors, incl. the committee's chairman, the legal counsel, and the accounting advisors (Deloitte) all resigned or terminated their engagements. The company has since hired new directors and said it "intends to engage new counsel and forensic auditors to continue its work." The stock has been delisted from NYSE Amex on June 24 and is since trading on the pinks.
Puda Coal (PUDA) is halted since April 11. Last reported trade was at $6.00, but the stock will likely open significantly lower when trading resumes. The Trading China Tracker Score is UNDER REVIEW, the Trading China Safety Score is 6% (Extreme Risk).
Apparently, the chairman of Puda Coal stole almost the entire company from U.S. shareholders, sold half of it to Chinese investors, and pledged the other half as security for a loan at 14.5%(!). The company has basically admitted fraud by stating that "although the investigation is in its preliminary stages, evidence supports the allegation that there were transfers by Mr. Zhao in subsidiary ownership that were inconsistent with disclosure made by the Company in its public securities filings." The stock has been halted since April 11 and the company completely ignored the due date for its first quarterly report of 2011. PUDA's independent auditor for six years, Moore Stephens Hong Kong, resigned on July 7, which makes it very unlikely that the stock will reopen again on NYSE Amex.
ShengdaTech (SDTH.PK) is currently trading at $0.53, down 89.19% for the year. The Trading China Tracker Score is UNDER REVIEW, the Trading China Safety Score is 13% (Extreme Risk).
When ShengdaTech failed to timely file its annual report for 2010 the stock was halted by Nasdaq. Shortly after it came to light that SDTH's auditor, KPMG, found "serious accounting and operational issues," and informed the exchange of "deliberate and ongoing efforts of the company’s Chief Executive Officer and Acting Chief Financial Officer to obstruct an internal investigation into these matters." The Acting CFO resigned on April 21, followed by the auditor on April 29. KMPG was replaced by Marcum Bernstein & Pinchuk on June 9, however a final engagement is still pending satisfactory completion of Marcum's new client acceptance procedures. For the past six weeks no new developments regarding the status of investigation and auditor have been filed, and the stock has been delisted and is trading on the pink sheets since June 10, 2011.
Subaye (SBAY.PK) is currently trading at $0.49, down 95.02% for the year. The Trading China Tracker Score is UNDER REVIEW, the Trading China Safety Score is 0% (Extreme Risk).
In my opinion this is the most outrageous of all the Chinese frauds, it is almost comical. If you are interested in a bit of cheerful entertainment you really should dig into the Subaye story - it claimed to be an entertainment company after all. Subaye is currently at its third CFO since March, its CEO resigned in May, its auditor in April and hasn't been replaced since. The stock has been delisted on June 24, and is now trading on the pink sheets.
Just one snippet to illustrate all this craziness: Subaye's last official guidance, presented in December 2010, called for earnings per share of exactly $3.12 in FY2011. If the company were not blatantly lying, a P/E of 5 were justified and the stock would be worth at least $15, a level it reached briefly in January of the current year. Now the employment agreement with SBAY's newest CFO, Jacqueline Ng, dated June 1, guarantees her the following compensation: an annual salary of $60,000, a sign-on bonus of 150,000 shares, and a minimum annual bonus of 100,000 shares of common stock. That means CFO No.3 Miss Ng would receive stock worth at least $3.75 million additionally to her annual salary as compensation for her CFO duties, if the company's representation of its net profits and prospects would have any credibility. Even at the current stock price her compensation is outrageously high. She's not alone, though. In the same filing it was revealed that SBAY's new CEO, a German national who seems to be in the IR business and doing side-jobs like serving as honorary consul for the Republic of Belize in Germany, will receive the same 250,000 shares plus $80,000 annual salary.
Wonder Auto Technology (WATG) is halted since May 9. Last reported trade was at $5.42, but the stock will likely open significantly lower when trading resumes. The Trading China Tracker Score is UNDER REVIEW, the Trading China Safety Score is 26% (Extreme Risk).
When WATG failed to file its 2010 annual report, the company announced an internal investigation into reported accounting matters, incl. that it had engaged in several transactions without properly disclosing their related-party nature. Intermediate results led to announced restatements for fiscal years 2008, 2009 and 2010, and for the quarters ended March 31, June 30 and September 30, 2009 and 2010. This investigation was originally expected to conclude by the end of July, but that is now a very unlikely outcome. On July 12, both the CEO and CFO resigned from their positions without giving a reason. Wonder Auto's auditor, Big Four firm PricewaterhouseCoopers, is apparently still with the company. Trading in the Nasdaq-listed stock has been halted for ten weeks now, and at this point it is very unlikely that it will reopen on the big boards again.
Yuhe International (YUII.PK) is currently trading at $0.97, down 89.17% for the year. The Trading China Tracker Score is UNDER REVIEW, the Trading China Safety Score is 0% (Extreme Risk).
Chicken breeder Yuhe International claimed to have acquired 13 breeder farms from a competing business in 2009, but an investigatory report from Geoinvesting proved those claims wrong and the company was lying to investors. YUII's auditor resigned on June 17 due to "management’s misrepresentation and failure to disclose material facts surrounding certain acquisition transactions and off-balance sheet related party transactions." The stock was delisted from Nasdaq on July 21, and is since trading on the pink sheets.
Jiangbo Pharmaceuticals (JGBO) is halted since May 31. Last reported trade was at $3.08, but the stock will likely open significantly lower when trading resumes. The Trading China Tracker Score is UNDER REVIEW, the Trading China Safety Score is 14% (Extreme Risk).
The Securities and Exchange Commission subpoenaed the company on March 26 and Jiangbo's audit committee started an internal investigation of the issues raised by the SEC. Elsa Sung, Jiangbo's CFO, resigned on March 31. On June 6, the independent members of the Audit Committee jointly resigned, stating that JGBO's "chairman and members of his management team have exhibited repeatedly their unwillingness to cooperate in even the most basic requests," and - among other things - the investigation "raised serious concerns regarding the veracity or correctness of banking information provided by the company."
Michael Marks, former independent director and Chairman of JGBO's Audit Committee filed a very long (22 pages) and detailed account of the internal investigation with the SEC. If you are interested in the troubles of U.S.-listed Chinese companies, you should take the time to read the full letter. You will find real gems in there, such as the manager of Jiangbo's materials department refused to leave the employee wash room in order to avoid answering Ernst & Young's questions. Or that the law firm's fee was paid from a personal account of an individual who turned out to be Jiangbo's cashier - via internet banking - when Jiangbo previously told Ernst & Young that the company did not use and did not have access to internet banking.
The stock remains halted on Nasdaq and will likely get delisted soon. Anyone out there who still believes this company has almost $150 million cash on the bank?
This was a very long account of (likely) fraudulent Chinese stocks which blew up in the first half of 2011. But it is far from complete! I did not mention several other cases, including Longtop Financial (LFT), Duoyuan Global Water (DGW), or A-Power Energy (APWR), and there are many stocks with similar problems that never made it to the big boards and are still quoted on the bulletin boards or pink sheets.